# Synthetic variance-commentary example

This teaching example is fictional. It is not company data, client work or the output of a current Claude or ChatGPT test. All amounts are in USD thousands. The commentary was written and checked manually to demonstrate the required distinction between calculation, documented explanation and unsupported inference.

## Input 1: monthly actual-versus-budget table

| Line | Budget | Actual | Actual minus budget | Management view |
|---|---:|---:|---:|---|
| Product A revenue | 600 | 570 | -30 | Unfavourable |
| Product B revenue | 400 | 350 | -50 | Unfavourable |
| **Total revenue** | **1,000** | **920** | **-80** | **Unfavourable** |
| Cost of goods sold | 550 | 525 | -25 | Favourable |
| **Gross profit** | **450** | **395** | **-55** | **Unfavourable** |
| Payroll | 200 | 215 | 15 | Unfavourable |
| Marketing | 80 | 60 | -20 | Favourable |
| Software | 40 | 48 | 8 | Unfavourable |
| Other operating expense | 30 | 32 | 2 | Unfavourable |
| **Total operating expense** | **350** | **355** | **5** | **Unfavourable** |
| **Operating profit** | **100** | **40** | **-60** | **Unfavourable** |

Sign convention: `actual minus budget`. For revenue and profit, a negative variance is unfavourable. For cost and expense, a negative variance is favourable.

## Input 2: approved business notes

- Close status: Finance completed cutoff and accrual or prepayment checks before preparing this input. The AI is drafting commentary from approved accounting figures; it is not deciding recognition.
- Product B: Service delivery for two engagements worth 22.5 each moved to next month.
- Cost of goods sold: Contractor work budgeted at 18 moved to next month. Usage-based hosting was 7 below budget.
- Payroll: An approved contractor extension added 15.
- Marketing: A campaign with a budget of 20 moved to next month.
- Software: After finance checked the annual prepayment during close, an additional 8 above budget was recognized as current-month software expense.
- No approved explanation was supplied for Product A revenue, the remaining Product B shortfall or Other operating expense.
- No forecast data was supplied.

## Prompt pattern

```text
You are preparing draft management commentary from the two supplied inputs.

Rules:
1. Recalculate every subtotal and variance. Use actual minus budget.
2. Keep revenue/profit favourability separate from cost/expense favourability.
3. Use only the approved business notes to explain causes.
4. Label each statement as one of:
   - OBSERVED: directly supported by the table or approved note;
   - INFERENCE: a possible interpretation that requires confirmation;
   - UNEXPLAINED: a material variance with no approved cause.
5. Do not create causes, forecast effects, customer names or corrective actions.
6. Keep actual, budget and forecast separate. No forecast is supplied.
7. Report arithmetic-check failures before writing commentary.
8. Produce: executive commentary, a driver table, unexplained items and reviewer checks.
```

## Manually checked sample commentary

**Executive commentary**

- **OBSERVED:** Revenue was 920 against a budget of 1,000, an 80 unfavourable variance (8.0%). Product A contributed 30 of the shortfall and Product B contributed 50.
- **OBSERVED:** Approved notes attribute 45 of the Product B shortfall to service delivery for two engagements moving to next month. The remaining 5 Product B shortfall is **UNEXPLAINED**. The 30 Product A shortfall is also **UNEXPLAINED**.
- **OBSERVED:** Cost of goods sold was 525 against 550, a 25 favourable variance (4.5%). Approved notes identify contractor work of 18 moving to next month and 7 lower usage-based hosting. The moved work is timing-related, so it should not be described as a sustained saving.
- **OBSERVED:** Gross profit was 395 against 450, a 55 unfavourable variance. This reconciles to the 80 revenue shortfall partly offset by 25 lower cost of goods sold.
- **OBSERVED:** Operating expense was 355 against 350, a 5 unfavourable variance. Payroll was 15 over budget, software was 8 over and other operating expense was 2 over; these were partly offset by marketing at 20 below budget.
- **OBSERVED:** Approved notes explain the payroll, marketing and software movements. The 2 other-operating-expense overrun is **UNEXPLAINED**.
- **OBSERVED:** Operating profit was 40 against 100, a 60 unfavourable variance. The movement reconciles to 55 lower gross profit and 5 higher operating expense.
- **UNEXPLAINED:** No forecast was supplied, so the effect on the full-year outlook cannot be assessed.

## Arithmetic check

- Revenue: 570 + 350 = 920; 920 − 1,000 = −80.
- Gross profit: 920 − 525 = 395; 395 − 450 = −55.
- Operating expense: 215 + 60 + 48 + 32 = 355; 355 − 350 = 5.
- Operating profit: 395 − 355 = 40; 40 − 100 = −60.
- Profit bridge: −80 revenue + 25 favourable COGS − 5 adverse operating expense = −60.
- Explained Product B variance: 2 × 22.5 = 45; 50 − 45 = 5 unexplained.